Private Companies: Consider These Financial Reporting Shortcuts

For years, private companies and their stakeholders have complained that the Financial Accounting Standards Board (FASB) catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. In other words, they have said that U.S. Generally Accepted Accounting Principles (GAAP) are too complicated for them. The FASB answered these complaints by issuing some Accounting Standards Updates (ASUs) that apply exclusively to private companies.

“Little GAAP”

Currently there are four ASUs that apply only to private companies:

ASU No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Under this alternative, private companies may elect to amortize goodwill on their balance sheets over a period not to exceed 10 years, rather than test it annually for impairment.

ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets — such as non-competes and certain customer-related intangibles — when they buy or merge with another company. It does not eliminate the requirement to recognize and separately value other intangible assets acquired in business combinations, such as trade names and patents.

ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions. It is important to note that the FASB is currently considering expanding this alternative. In June 2017, the FASB issued a proposal that would allow private companies that use variable interest entities (VIEs) to skip the consolidation guidance. Comments on the proposal are due on September 5.

No effective dates or preferability assessments

After the FASB issued these alternatives, it updated the guidance to remove the effective dates. It also has exempted private companies from having to make a preferability assessment before adopting one of these accounting alternatives. Under the previous rules, a private company that wanted to adopt an accounting alternative after its effective date had to first assess whether the alternative was preferable to its accounting policy at that time.

Forgoing an initial preferability assessment allows private companies to adopt a private company accounting alternative when they experience a change in circumstances or management’s strategic plan. It also allows private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.

Right for you?

Simplified reporting sounds like a smart idea, but regulators, lenders, and other stakeholders may require a private company to continue to apply traditional accounting models, especially if the company is large enough to consider going public or may merge with a public company. We can help private companies weigh the pros and cons of electing these alternatives.